HEALTHCARE OPTIMISTIC ABOUT ECONOMY BUT WARY OF VOLATILITY AND GEOPOLITICAL RISKS

NEPC today announced the results of its latest Healthcare Operating Fund Universe, which gauges healthcare organizations’ outlook on the economy and examines how healthcare company operating pools are invested.

The study found that overall, participants are optimistic about the economy and healthcare sector, as well as their relative strategic position. Nearly two-thirds (63%) of respondents believe the economy is well-positioned for future growth, and almost half (48%) said the healthcare sector is better positioned this year compared to recent history. Sixty-one percent of respondents believe the new tax law will help the economy, and the vast majority (98%) anticipate positive returns from the S&P 500 this year.

Healthcare Organizations Bullish on Emerging Markets and Alternatives

The study suggests that most participants are willing to maintain or even increase their investment risk profile. The majority of respondents believe emerging market equities (28% of respondents) and alternatives (26%) will be the best-performing asset classes this year – two classes that tend to generate the most volatility. Other asset classes selected by respondents as the year’s potential top performers are international developed equities (17%), domestic equities (13%) and hedge funds (13%).

“The study found a correlation between performance and risk – the healthcare organizations with a higher level of expected risk also tended to have stronger returns last year,” said Dave Moore, partner and head of NEPC’s healthcare practice. “Broadly speaking, the lower-rated systems with lower days cash on hand (DCOH) expressed an increased appetite for risk, while some of the better-rated systems with higher DCOH indicated a minor reduction of risk. The potential for an increase in investment risk may be reflective of a reduction in operational risk – however, this is difficult to assess.”

Geopolitical Uncertainty Dwarfs Other Potential Threats

The study also asked participants about what they consider to be the greatest threats to their investment performance over the near term. Geopolitical uncertainty was widely viewed as the biggest threat, followed by a potential global slowdown. Three-quarters (74%) of respondents characterized rising interest rates as a minor concern.

“With 2018 ushering in an uptick in market volatility, we suspect healthcare organizations’ portfolio risk profile may come under increased scrutiny,” Moore added. “Later this year, we suspect we may see a shift in asset allocation toward becoming a bit more defensive in preparation for the possibility of a market downturn. Already, the participants we surveyed appear to be tactically adjusting their risk exposure.”

About the Healthcare Operating Fund Universe

The Healthcare Operating Fund Universe was created based on a survey conducted online by NEPC’s Healthcare Practice in April/May 2018 that had 62 respondents. Copyright is held by NEPC.